Rental Housing Supply and Build-to-Rent Conundrum in Australia

Abstract

Traditionally, rental housing has been supplied by a large pool of individual investors who own a few units and invest their savings, with some leverage, to take advantage of the tax regime in Australia. The last five years have seen the emergence of build-to-rent (BTR) units, which are supplied by investors who own a large number of units. The state of Victoria in Australia has the largest share of these projects. In the current market and regulatory environment, the financial viability of BTR projects is low for investors and hinges on the ability of units to be leased at higher than market rents. This paper examines four groups of levers, including those already being pursued by the building industry, that can be used to improve the financial viability of BTRs. These include: (i) revenue maximization, (ii) cost reduction (iii) fiscal and (iv) planning incentives. An archetypical BTR project which mimics current practice is considered, assumed to be in Docklands, Victoria, where several BTR projects are planned. For the robustness check, a feasibility analysis is conducted for a site in North Melbourne, a neighbourhood in Victoria with several BTR projects. The results indicate that for revenue maximization, the mix of unit types in a BTR project should be location-specific, as market preferences (and the characteristics of renters) determine the rent for different types of units that can be achieved. In a conventional BTR project development, where land is bought upfront and the project is developed, the mixed-use BTR (residential in combination with commercial) does not provide significant financial benefits though including small retail (3–4% of the net lettable area) may provide complementary benefits. Incurring large capital costs upfront and having the revenue stream spread over long periods reduces financial viability. While construction costs are more difficult to reduce, ways to reduce land costs could be through zoning land for BTR use, through mechanisms such as joint ventures with landowners, and land leasing. Exemptions on income, land tax, and rates (like CHPs) can result in a higher return for investors. A full GST refund, an incentive that industry is lobbying for, results in a similar IRR as an exemption on income, land tax and rates would offer. These results will assist in determining priorities for policies that are aimed at BTR.